DOCSLIB.ORG

Reducing Low-Income Country Debt Risks

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Reducing Low-Income Country Debt Risks Briefing note Reducing low-income country debt risks The role of local currency-denominated loans from international institutions Jesse Griffiths, Ugo Panizza and Filippo Taddei May 2020 • Low-income countries, already facing significant challenges, now face a dramatic worsening of debt sustainability and the possibility of a widespread debt crisis because of the Covid-19 pandemic. Key messages • These countries are sensitive to external shocks partly because a large proportion of their debt is held in foreign currency and widespread devaluation of their own currencies has made their debt situation much worse. • The ability to borrow long term, internationally, in local currency could significantly reduce borrowing risks for low-income countries, but they would need help from multilateral institutions to do so. • This briefing outlines four options as to how low-income country debt risks could be reduced in a way that overcomes challenges, including the institutional rules of multilaterals, political economy problems and issues of moral hazard: 1. Multilaterals accept the currency risk themselves. 2. Multilaterals hedge lending through another institution. 3. Multilaterals borrow from local capital markets and on-lend. 4. Multilaterals borrow abroad and on-lend in local currency. • These options should be developed to generate workable proposals for discussion with low-income countries, with a view to identifying how greater availability of local-currency funding could help them reduce debt risks. Purpose of this briefing will limit governments’ ability to cover existing expenditure and refinance their maturing debt. This briefing contributes to the discussion The large capital outflows, currency depreciation, on how to reduce debt risks for low-income fall in commodity prices and economic slump developing countries – an important issue in associated with the Covid-19 crisis are likely to recent years and now a policy priority as the lead to numerous debt crises. These problems are Covid-19 crisis escalates debt problems. It aims not due to policy failures in the developing world to identify and assess options for increasing the but to external factors, including skyrocketing supply of local currency-denominated lending by financing needs in advanced economies, elevated multilateral institutions to sovereign governments risk aversion among investors and the global in low-income countries, thus shielding them economic downturn. The severity of the crisis from risks associated with currency depreciation. in emerging and low-income countries has It is intended to promote debate and reinvigorate led to calls for widespread debt suspension or the consideration of serious policy proposals in cancellation, and the International Monetary this neglected but important area at a time when Fund (IMF) and G20 group of industrialised innovative ways of reducing debt risks for low- nations have taken steps in this direction. income countries are of paramount importance. From when the crisis exploded to 9 April 2020, more than 90 countries had requested or Background expressed interest in IMF support, around 60% of them low-income countries (IMF, 2020b). Public external debt in low-income countries Capital outflows have led to currency has been rising since 2012. The median public depreciations, with significant effects on low- debt of low-income economies1 rose to 49% income countries where external debt makes up of gross domestic product (GDP) in 2019 from a major share of total debt. According to the 33% in 2013 (IMF, 2020a). The composition Institute for International Finance, between mid- of low-income country public debt has changed February and the end of March 2020, emerging dramatically in recent years, with declining economies registered record portfolio outflows concessionality and increased borrowing from totalling more than $100 billion (IMF, 2020c). private, non-traditional official and domestic To put this in context, total portfolio outflows in lenders. While the share of low-income country the three months after the 2008 global financial debt owed to private creditors had more than crisis were about $20 billion. The latest outflows doubled to nearly 6% of GDP as of 2016, have been associated with large currency the share of debt owed to bilateral creditor depreciations, which have averaged 15% in a members of the Paris Club was just over 2% of large sample of developing countries, but close to GDP. This compared with nearly 14% of GDP 30% in large emerging economies such as Brazil, owed to non-Paris Club creditors, with China Mexico, Russia and South Africa.2 Such big accounting for just over 4% of GDP. Domestic depreciations will have negative implications borrowing has been increasing, reaching more for debt sustainability in countries with large than 15% of GDP as of 2016, a level similar foreign-currency debt. Developing countries, to that borrowed from external multilateral including low-income countries, often have a creditors (IMF, 2018: 51). high proportion of debt denominated in external The Covid-19 crisis will have a massive currency, typically US dollars. In 2017, for effect on debt sustainability in developing example, an average 74% of low-income country countries. Higher healthcare costs, lower tax debt was denominated in a foreign currency and export revenues and frozen debt markets (Panizza and Taddei, 2020: 9). This is still the 1 There are several definitions of what constitutes a ‘low-income country’. We have used the IMF definition of ‘low-income economy’, as it is the broadest, encompassing 76 countries. All IMF citations refer to this grouping (IMF, 2020a: 46). 2 Authors’ calculations based on data from the Bank for International Settlements. 2 case, even though domestic debt levels have risen more than 15% of government revenues to debt significantly in many low-income countries. servicing in 2017, up from 21 countries in 2014 Partly as a result of this external currency- (UNCTAD, 2018: 7). denominated debt, low-income country debt As a result of increasing debt levels and the levels are particularly sensitive to external rising cost of debt, the number of low-income shocks. Debt sustainability analyses confirm countries facing serious debt problems was that the majority of low-income countries are already climbing rapidly and is likely to jump vulnerable to exchange-rate changes (IMF, as a result of the Covid-19 crisis. The IMF and 2015) and many are vulnerable to changes in World Bank debt sustainability exercise classified commodity prices. We saw sharp increases in 44% of low-income countries as being at high fiscal deficits, for example, following the 2015 risk of or already in debt distress – a number commodity-price shock (IMF, 2018: 39). The that has more than doubled since 2013 (IMF, rise of foreign participation in domestic capital 2020a: 14). Low-income countries are now markets means that the risks associated with more integrated into the global economy than changes in investor sentiment have grown before and, consequently, more exposed to (Cornford, 2018). Sudden capital outflows market risks because of their greater reliance caused by external investors’ withdrawal from on private borrowing (IMF, 2015). Foreign- domestic debt markets can lead to both sudden currency bonds are also more likely to involve changes in exchange rates and funding shortfalls bullet payments that lead to spikes in financing for countries relying on those markets (IMF, needs (IMF, 2015), increasing risks and, 2018: 50). The Covid-19 economic crisis is potentially, refinancing costs. These figures are on a scale not seen before, so the extent of the based on debt sustainability analyses conducted external shock to low-income countries will be before the Covid-19 crisis. The number of significant over the course of 2020 and beyond. low-income countries in debt distress or at The changing nature of public debt meant risk of debt distress is, therefore, likely to that it had already become more expensive and increase dramatically. volatile in low-income countries before the crisis. This was primarily due to an increase in debt Local-currency borrowing: a key tool owed to the private sector and an increase in for low-income countries domestic debt as a share of the total. Private debt tends to be significantly more expensive than The ability to borrow long term, internationally, alternative public lending from international in local currency could significantly reduce bilateral or multilateral sources and it is also borrowing risks for low-income countries and more pro-cyclical (Galindo and Panizza, 2018). help to reduce the likelihood of debt crises. Like Mark Twain’s proverbial banker, private As noted, the large currency depreciations that financiers stand ready to lend you an umbrella countries are experiencing have a dramatic when the sun is shining but want it back the impact on debt sustainability, largely because minute it starts to rain. As a result, debt-servicing they owe a considerable proportion of their debt costs are absorbing a growing share of public in foreign currencies. A recent study found that expenditure (IMF, 2018: 50), with yields spiking debt-to-GDP ratios tend to grow more rapidly in bad times. One analysis using IMF and World when countries that have a high share of foreign- Bank data suggests that the 124 developing currency debt undergo currency depreciation countries for which data is available spent a (Panizza and Taddei, 2020).3 Another advantage mean average 12.2% of government revenue on of long-term international borrowing in local debt servicing in 2018, up from 6.6% in 2010 currency is that it could provide an alternative to (Jubilee Debt Campaign, 2019). Another analysis borrowing from domestic debt markets. This is finds that 29 developing countries devoted especially useful in countries where domestic 3 Panizza and Taddei (2020) do not focus on maturity, but countries need to be careful not to trade currency mismatches for maturity mismatches. 3 sovereign borrowing levels are high or domestic the other side (borrowing), and vice versa.
Load more

Recommended publications
  • Fear of Floating and Domestic Liability Dollarization
    FEAR OF FLOATING AND DOMESTIC LIABILITY DOLLARIZATION Adam Honig* Department of Economics Amherst College June 2005 Abstract Previous attempts to analyze the effect of liability dollarization on “fear of floating” have focused exclusively on the role played by foreign liabilities. Liability dollarization of the domestic banking system, however, poses a similar risk as dollar-denominated deposits and credit impose a source of currency risk on domestic banks and firms respectively. Findings from a large cross-country sample indicate that domestic liability dollarization plays a central role in producing a “fear of floating” among emerging market countries and developing nations. This is an important result because domestic liability dollarization is more reversible than the dollarization of foreign liabilities, providing a reason for optimism that these countries can regain flexibility in the choice of exchange rate regime and overcome their “fear of floating.” JEL Classification: F33, G21. Keywords: Fear of floating; Unofficial dollarization. _____________ * Correspondence: Adam Honig, Department of Economics, Campus Box 2201, Amherst College. Amherst, MA 01002-5000. Email, [email protected]. Phone: (413) 542-5032. Fax: (413) 542-2090. 1. Introduction The optimal currency area literature (Mundell, 1961; McKinnon, 1963) provides valuable insights into the choice of exchange rate regime in advanced economies. Unfortunately, this decision is more complicated for emerging markets and developing nations, which face a host of additional concerns. A serious issue that has received much recent attention is the dollarization of liabilities.1 Unhedged foreign-currency-denominated liabilities are a major source of vulnerability for both firms and banks because large depreciations can lead to significant reductions in net worth (Mishkin, 1996; de Nicoló, Honohan and Ize, 2005).
    [Show full text]
  • Debauchery and Original Sin: The
    Debauchery and Original Sin: The Currency Composition of Sovereign Debt Preliminary Charles Engel1 JungJae Park2 Abstract This paper quantitatively investigates the currency composition of sovereign debt in the presence of two types of limited enforcement frictions arising from a government’s monetary and debt policy: strategic currency debasement and default on sovereign debt. Local currency debt has better state contingency than foreign currency debt in the sense that its real value can be changed by a government’s monetary policy, thus acting as a better consumption hedge against income shocks. However, this higher degree of state contingency for local currency debt provides a government with more temptation to deviate from disciplined monetary policy, thus restricting borrowing in local currency more than in foreign currency. The two financial frictions related to the two limited enforcement problems combine to generate an endogenous debt frontier for local and foreign currency debts. Our model predicts that a less disciplined country in terms of monetary policy borrows mainly in foreign currency, as the country faces a much tighter borrowing limit for local currency debt than for the foreign currency debt. Our model accounts for the surge in local currency borrowings by emerging economies in the recent decade and “Mystery of Original Sin” by Eichengreen, Haussman, Panizza (2002). (JEL: E32, E44, F34) 1 University of Wisconsin-Madison. Email: [email protected] 2 National University of Singapore. Email: [email protected] 1 Introduction “Original Sin” in the international finance literature refers to a situation in which most emerging economies are not able to borrow abroad in their own currency.
    [Show full text]
  • Chapter Three: Measuring Currency Mismatch: Beyond Original
    ch03_6012_IIE 04/01/04 9:20 AM Page 21 3 Measuring Currency Mismatch: Beyond Original Sin A currency mismatch refers to how a change in the exchange rate will affect the present discounted value of future income and expenditure flows. This will depend on two broad elements. One is the currency denomination of financial assets and liabilities: the more sensitive the net financial worth to changes in the exchange rate, the greater, ceteris paribus, the currency mismatch. The other is the currency denomination of future income and expenditure flows (other than returns to capital assets). Once such a broad perspective is adopted, significant differences in the degree of currency mismatch are revealed both across emerging economies and over time. As an analytical counterpoint to our proposed definition of currency mismatch, suppose one attempted to gauge aggregate currency mis- match by looking only at the share of international bonds and bank loans denominated in the borrower’s local currency—that is, suppose one used measures of original sin as a sufficient statistic for drawing inferences about aggregate currency mismatch. How might the original sin measures lead one astray? It turns out that the answer is helpful in understanding what should be included in a good measure of currency mismatch. Original Sin: A Misleading Measure Table 3.1, taken from Eichengreen, Hausmann, and Panizza (2002), gives three measures of original sin. These measures are defined as one minus the percentage of own currency–denominated securities in the relevant
    [Show full text]
  • The Effects of Liability Dollarization on Manufacturing Competitiveness1
    Journal of Business, Economics and Finance -JBEF (2020), Vol.9(4). p.347-355 Caglarirmak, Kapkara THE EFFECTS OF LIABILITY DOLLARIZATION ON MANUFACTURING COMPETITIVENESS1 DOI: 10.17261/Pressacademia.2020.1315 JBEF- V.9-ISS.4-2020(6)-p.347-355 Nilgun Caglarirmak Uslu1, Sevcan Kapkara2 1Anadolu University, Department of Economics, Tepebasi, Eskisehir, Turkey. [email protected], ORCID: 0000-0001-6254-5784 2Anadolu University, Department of Economics, Tepebasi, Eskisehir, Turkey. [email protected], ORCID: 0000-0002-7864-0505 Date Received: October 22, 2020 Date Accepted: December 15, 2020 To cite this document Caglarirmak-Uslu, N., Kapkara, S., (2020). The effects of liability dollarization on manufacturing competitiveness. Journal of Business, Economics and Finance (JBEF), V.9(4), p.347-355. Permanent link to this document: http://doi.org/10.17261/Pressacademia.2020.1315 Copyright: Published by PressAcademia and limited licensed re-use rights only. ABSTRACT Purpose- This study aims to investigate the effect of liability dollarization on competitiveness of sub-sectors operating in Turkish manufacturing industry. Within the scope of the NACE Rev-2 classification, the study used annual data covering the 2008-2016 period for the sub-sectors of the manufacturing industry. Methodology- A group of econometric tests; fixed effects and random effects approaches have been estimated from panel data methods. Findings- Variables affecting the manufacturing industry competitiveness were found to be liability dollarization, economic globalization index, energy prices, economic crisis, trade openness, and basket exchange rate. The variable to be used as the “measure of competitiveness” to represent the dependent variable is the ratio of net exports to foreign trade volume.
    [Show full text]
  • The Recent Experience of the Korean Economy with Currency Internationalisation
    The recent experience of the Korean economy with currency internationalisation Gwang-Ju Rhee1 1. The pros and cons of Korean won internationalisation in the light of the recent financial crisis Since the late 1980s, Korea has continued making institutional improvements aimed at providing the basis for Korean won internationalisation, in order to enlarge its benefits. Faced with the recent global financial turmoil, however, the internationalisation of the Korean won may be a two-sided coin. In other words, while the need for internationalisation has increased, its side effects cannot be underestimated. The pros of Korean won internationalisation Korean won internationalisation would have various economic benefits. It would enable domestic economic agents to avoid foreign exchange risk and save on foreign exchange transaction costs, help in the development of domestic financial and foreign exchange markets, reduce the need for external payment reserves, and generate seigniorage profits. Moreover, given the ongoing global financial crisis, the merits of internationalisation of the won may increase further in the long term. First of all, if the Korean won were internationalised, the exchange rate risk of private economic agents, including exporters and importers, could be reduced. In particular, recent events in the Korean foreign exchange derivatives market such as the “knock-in/knock-out option”2 and the “snowball” could be better managed. Moreover, importers would not need to pass-through the additional costs of currency depreciation to consumers, and thus inflationary pressures could be mitigated. The second benefit of Korean won internationalisation is that the Korean economy would be more resilient to external shocks. For example, issuance of won-denominated overseas securities could help to reduce the possibility of double mismatches in currency and maturity.
    [Show full text]
  • Currency Mismatches, Debt Intolerance and Original Sin: Why They Are Not the Same and Why It Matters
    NBER WORKING PAPER SERIES CURRENCY MISMATCHES, DEBT INTOLERANCE AND ORIGINAL SIN: WHY THEY ARE NOT THE SAME AND WHY IT MATTERS Barry Eichengreen Ricardo Hausmann Ugo Panizza Working Paper 10036 http://www.nber.org/papers/w10036 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 October 2003 The views expressed herein are those of the authors and not necessarily those of the National Bureau of Economic Research. ©2003 by Barry Eichengreen, Ricardo Hausmann, and Ugo Panizza. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. Currency Mismatches, Debt Intolerance and Original Sin: Why They Are Not the Same and Why it Matters Barry Eichengreen, Ricardo Hausmann, and Ugo Panizza NBER Working Paper No. 10036 October 2003 JEL No. F0, F33, F34 ABSTRACT Recent years have seen the development of a large literature on balance sheet factors in emerging- market financial crises. In this paper we discuss three concepts widely used in this literature. Two of them – “original sin” and “debt intolerance” – seek to explain the same phenomenon, namely, the volatility of emerging-market economies and the difficulty these countries have in servicing and repaying their debts. The debt-intolerance school traces the problem to institutional weaknesses of emerging-market economies that lead to weak and unreliable policies, while the original-sin school traces the problem instead to the structure of global portfolios and international financial markets. The literature on currency mismatches, in contrast, is concerned with the consequences of these problems and with how they are managed by the macroeconomic and financial authorities.
    [Show full text]
  • Original Sin Redux’: Currency Hierarchy and Financial Globalisation in Emerging Economies
    Texto para Discussão 033 | 2020 Discussion Paper 033 | 2020 The metamorphosis of external vulnerability from ‘original sin’ to ‘original sin redux’: Currency hierarchy and financial globalisation in emerging economies Luiz Fernando de Paula Professor of Economics at Federal University of Rio de Janeiro (IE/UFRJ), Coordinator of the Economics and Politics Studies Group at IESP/UERJ, and CNPq and FAPERJ Researcher Barbara Fritz Professor of Economics at Freie Universität Berlin Daniela Prates Senior Economic Affairs Officer at UNCTAD and Associate Professor (on leave) at IE-UNICAMP This paper can be downloaded without charge from http://www.ie.ufrj.br/index.php/index-publicacoes/textos-para-discussao The metamorphosis of external vulnerability from ‘original sin’ to ‘original sin redux’: Currency hierarchy and financial globalisation in emerging economies1 November, 2020 Luiz Fernando de Paula Professor of Economics at Federal University of Rio de Janeiro (IE/UFRJ), Coordinator of the Economics and Politics Studies Group at IESP/UERJ, and CNPq and FAPERJ Researcher Barbara Fritz Professor of Economics at Freie Universität Berlin Daniela Prates Senior Economic Affairs Officer at UNCTAD and Associate Professor (on leave) at IE-UNICAMP 1 Version: 17/09/2020 IE-UFRJ DISCUSSION PAPER: PAULA; FRITZ; PRATES, TD 033 - 2020 2 Abstract How has financial globalisation changed the nature of external vulnerability of emerging economies? To answer this question, we first present an overview of the changes in international capital flows and cross-border stocks involving emerging economies from the 1970s to the COVID-19 crisis, and then identify relevant recent shifts in financial globalisation. We link the concepts of financialisation, subordinated financial integration and currency hierarchy, extending the latter to consider the most recent features of financial globalisation.
    [Show full text]
  • Original Sin and Dark Matter (Still) Matter: Asset Composition and Solvency
    ORIGINAL SIN AND DARK MATTER (STILL) MATTER: ASSET COMPOSITION AND SOLVENCY Ricardo Hausmann Harvard University & Santa Fe Institute Why do we care about deficits? • Because deficits determine the evolution of net financial assets • Surplus = ΔNet Financial Assets = ΔNFA • Financial income is a function of financial assets and liabilities • Fin.Income= i * NFA • The higher the debt, the higher the primary surplus needed to be solvent • Steady State Primary Surplus = (i - g) d • Where g is the nominal growth rate and d is the debt to GDP ratio • This is true both for fiscal dynamics as well as balance of payments dynamics For example, let us look at Japan Japan accumulated US$3TinCASand increased itsFin. IncomeinUS$B140 Cumulative Current Account, Billions 0 1000 2000 3000 1980 1990 Investment Income Net, Billions USD Cumulative Current Account, Billions year 2000 2010 0 50 100 150 Investment Income Net, Billions USD CAS and2.5%in netfinancialincome Japan accumulated ~50%ofGDPin Cumulative Current Account, % of GDP 0 .2 .4 .6 1980 Investment Income Net, % of GDP %of Net, Income Investment Cumulative Current Account, % ofGDP 1990 year 2000 2010 0 .01 .02 .03 Investment Income Net, % of GDP Japan: implied interest rate is reasonable .07 .06 Implied interest rate interest Implied .05 .04 1990 1995 2000 2005 2010 year But many countries do not look like Japan Let us look at the US but itsfin.income wentupbyUS$130B The USaccumulated US$8TinCAD, Cumulative Current Account, Billions -8000 -6000 -4000 -2000 0 1980 1990 Investment Income Net, Billions
    [Show full text]
  • Currency Mismatches, Debt Intolerance, and the Original Sin: Why They Are Not the Same and Why It Matters
    This PDF is a selection from a published volume from the National Bureau of Economic Research Volume Title: Capital Controls and Capital Flows in Emerging Economies: Policies, Practices and Consequences Volume Author/Editor: Sebastian Edwards, editor Volume Publisher: University of Chicago Press Volume ISBN: 0-226-18497-8 Volume URL: http://www.nber.org/books/edwa06-1 Conference Date: December 16-18, 2004 Publication Date: May 2007 Title: Currency Mismatches, Debt Intolerance, and the Original Sin: Why They Are Not the Same and Why It Matters Author: Barry Eichengreen, Ricardo Hausmann, Ugo Panizza URL: http://www.nber.org/chapters/c0150 3 Currency Mismatches, Debt Intolerance, and Original Sin Why They Are Not the Same and Why It Matters Barry Eichengreen, Ricardo Hausmann, and Ugo Panizza 3.1 Introduction Recent years have seen the development of a large literature on balance sheet factors in financial crises.1 The balance sheet approach focuses on the impact of disturbances on the assets, liabilities, and net worth of house- holds, firms, government, and the economy as a whole and on the implica- tions for growth and stability. Some studies focus on the net worth effects of shocks to the exchange rate in the presence of foreign currency–denom- inated liabilities. Others look at liquidity or interest rate shocks when the tenor of a bank, firm, or country’s liabilities is shorter than the tenor of its assets. In some studies the propagation mechanism is the impact on con- sumption and investment of the change in net worth of households and nonfinancial firms. In others it is the impact on the liquidity and solvency of financial institutions and markets and hence on confidence in the finan- cial system.
    [Show full text]
  • The Currency Composition of Sovereign Debt
    Debauchery and Original Sin: The Currency Composition of Sovereign Debt Charles Engel1 and JungJae Park2 September, 2021 Abstract We present a model that accounts for the “mystery of original sin”, and the surge in local currency borrowing by emerging economies in the recent decade. We quantitatively investigate the currency composition of sovereign debt in the presence of two types of limited enforcement frictions arising from a government’s monetary and debt policy: strategic currency debasement and default on sovereign debt. Local currency debt obligations act as a better consumption hedge against income shocks than foreign currency debt because their real value can be affected by monetary policy. However, this provides a government with more temptation to deviate from disciplined monetary policy, thus restricting borrowing in local currency more than in foreign currency. Our model predicts that a country with less credible monetary policy borrows mainly in foreign currency as a substitute for monetary credibility. An important extension demonstrates that in the presence of an expectational Phillips curve, local currency debt improves the ability of monetary policymakers to commit. JEL: E32, E44, F34 1 University of Wisconsin-Madison. Email: [email protected]. 2Yonsei University. Email: [email protected]. Charles Engel acknowledges support from the National Science Foundation, grant #MSN226099. JungJae Park is grateful for the financial support from the Ministry of Education of Singapore. This paper has been benefited from comments at numerous conferences and seminars. We thank Manuel Amador, Yan Bai, Javier Bianchi, Galina Hale, Dmitry Mukhin, and Pablo Ottonello for comments and discussion. 1. Introduction “Original sin” in the international finance literature refers to a situation in which emerging economy central governments are not able to borrow abroad in their own currency.
    [Show full text]
  • Original Sin Redux*
    Original Sin Redux Carol Bertaut Valentina Bruno Federal Reserve Board American University Hyun Song Shin Bank for International Settlements December 31, 2020 Preliminary and incomplete Abstract We explore the relationship between portfolio flows and financial conditions by using a unique and comprehensive database of US investor flows into emerging market government bonds. We find that mutual funds display a more procyclical pattern of flows relative to other investor types. Delving into the dynamics of portfolio flows at monthly frequency reveals that dollar appreciation amplifies the sell-off in EM local currency bonds, but not dollar-denominated bonds, possibly reflecting clientele effects of stickier investors toward dollar-denominated bonds. Our findings underscore how borrowing in domestic currency has not insulated emerging markets from fluctuations in global financial conditions. The views expressed here are those of the authors, and not necessarily those of the Bank for International Settlements or the Federal Reserve System. We thank Beau Bressler for excellent reseach assistance and Jimmy Shek for help with data. We also thank Ilhyock Shim for comments and suggestions. Corresponding author: Hyun Song Shin, Bank for International Settlements, Centralbahnplatz 2, Basel, Basel-Stadt 4002, Switzerland. Email: [email protected] 1 Introduction Historically, emerging market economies (EMEs) that borrowed from abroad were confined to doing so only in foreign currency. Eichengreen and Hausmann (1999) called the phenomenon “Original Sin”, highlighting what appeared to be the perpetual dependence of these economies on foreign currency borrowing, especially that denominated in US dollars. Currency mismatch exposed borrowers to the consequences of currency depreciation, further weakening the financial position of the borrowing government and perpetuating the reliance on foreign currency external debt.
    [Show full text]
  • Original Sin - Analysing Its Mechanics and a Proposed Remedy in a Simple Macroeconomic Model
    A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Lindner, Axel Working Paper Original Sin - Analysing Its Mechanics and a proposed Remedy in a Simple Macroeconomic Model IWH Discussion Papers, No. 11/2006 Provided in Cooperation with: Halle Institute for Economic Research (IWH) – Member of the Leibniz Association Suggested Citation: Lindner, Axel (2006) : Original Sin - Analysing Its Mechanics and a proposed Remedy in a Simple Macroeconomic Model, IWH Discussion Papers, No. 11/2006, Leibniz-Institut für Wirtschaftsforschung Halle (IWH), Halle (Saale), http://nbn-resolving.de/urn:nbn:de:gbv:3:2-4768 This Version is available at: http://hdl.handle.net/10419/23756 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu Institut für Halle Institute for Economic Research Wirtschaftsforschung Halle Original Sin Analysing Its Mechanics and a proposed Remedy in a Simple Macroeconomic Model Axel Lindner Juni 2006 Nr.
    [Show full text]